Both the equity capital markets and the debt capital markets in the United States are governed by the same basic regulatory framework and landscape. That framework includes laws, rules, and regulations at the federal level. In addition, each of the 50 states and certain other jurisdictions within the United States have separate sets of securities laws (so-called “blue sky laws”), which usually are preempted by federal laws.

At the federal level, the two principal statutes are the Securities Act of 1933 (the “Securities Act”), which regulates the offer and sale of both equity and debt securities, and the Securities Exchange Act of 1934 (the “Exchange Act”), which regulates the post-issuance trading, disclosure, market participants, exchanges, regulatory enforcement, and other related matters, including providing various bases for legal rights and claims in enforcement of those matters.  In particular, the Exchange Act regulates public reporting, proxy solicitations, tender offers, disclosure of ownership and trading of securities by company affiliates and exchange listing standards. Each of the Securities Act and the Exchange Act has generated numerous different, complex, and separate areas of specialty regulation and governance, as are discussed below. In furtherance of and with authority over those regulatory areas, the Exchange Act created the Securities and Exchange Commission (the “SEC”), with a broad and diverse set of powers (including to issue rules having the force of law, and various pronouncements, bulletins, and interpretive letters) and responsibilities, including to:

• oversee annual trading of approximately $118 trillion in U.S. equity markets, $2.8 trillion in exchange-traded equity options, and $237 trillion in the fixed income markets;
• review disclosures and financial statements of thousands of exchange-listed public companies with an aggregate market capitalization of $51 trillion;
• oversee activities of tens of thousands of registered entities, including investment advisers, mutual funds, exchange-traded funds, broker-dealers, and transfer agents, who collectively employ more than one million individuals in the United States;
• oversee dozens of national securities exchanges, nine credit rating agencies, seven active registered clearing agencies, the Public Company Accounting Oversight Board (“PCAOB”), which regulates auditing firms, the Financial Industry Regulatory Authority (“FINRA”), which regulates brokerages and other securities industry participants, the Municipal Securities Rulemaking Board (“MSRB”), which regulates municipal securities that raise capital for governmental and quasi-governmental agencies, the Securities Investor Protection Corporation (“SIPC”), which insures investor brokerage accounts, and the Financial Accounting Standards Board (“FASB”), which establishes accounting standards for the securities industry; and
• Provide critical market information through technology systems, such as the more than 70 million pages of documents available on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) disclosure system.

In addition, other federal securities statutes address key areas, including:

• the Trust Indenture Act of 1939, which regulates debt securities registered under the Securities Act;
• the Investment Company Act of 1940, which regulates mutual funds;
• the Investment Advisers Act of 1940, regulates investment advisers;
• the Sarbanes-Oxley Act of 2002, which regulates corporate responsibility and financial disclosures; and
• the Dodd-Frank Act of 2010, which addresses consumer protection, trading restrictions and corporate governance.

Listed public companies are also regulated by the securities exchanges on which they are listed, which is typically the New York Stock Exchange (the “NYSE”) or The Nasdaq Stock Market (“Nasdaq”), each of which has its own rules and regulations (subject to SEC approval) for initial and continued listing and multiple levels of listing.

A principal gating question for securities offerings in the United States is whether such offering will require registration with the SEC under the Securities Act. Such registration is costly, time consuming and triggers numerous other implications, liabilities, and obligations under securities laws (including under the Exchange Act). Exploring exemptions of an offering from such registration ordinarily is a major consideration in the United States. There are several separate such exemptions:

• Private placements – Rule 506(b)
• General solicitation – Rule 506(c)
• Limited offerings – Rule 504
• Regulation S
• Rule 144A
• Regulation Crowdfunding
• Regulation A
• Intrastate offerings
• Rule 701

Rule 506(b)

Rule 506(b) of Regulation D under the Securities Act is a “safe harbor” under Section 4(a)(2). Section 4(a)(2) of the Securities Act relates specifically to offerings that do not require registration because they are so-called “private placements”. Rule 506(b) provides objective standards that an issuer can rely on to be sure it meets the requirements of the Section 4(a)(2) exemption. Issuers conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is also subject to the following requirements:

• no general solicitation or advertising to market the securities; and
• securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment);

If non-accredited investors are participating in the offering, the issuer:

• must give all non-accredited investors extensive disclosure (the issuer is not required to provide specified disclosure to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to all non-accredited investors);
• must give any non-accredited investors financial statement information specified in Rule 506; and
• should be available to answer questions from prospective purchasers who are non-accredited investors.

Purchasers in a Rule 506(b) offering receive “restricted securities” that are subject to strict limitations of resale, which is subject to certain conditions, such as a minimum holding period and the public availability of information about the issuer. A company is required to file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(b), the states still have authority to require notice filings and collect state fees.

Rule 506(b) offerings are also subject to certain “bad actor” disqualification provisions as such term is defined SEC rules.

Rule 506(c)

Rule 506(c) of Regulation D permits issuers to broadly solicit and generally advertise an offering, provided that:

• all purchasers in the offering are accredited investors;
• the issuer takes reasonable steps to verify purchasers’ accredited investor status (whereas under Rule 506(b) in most cases an issuer may rely on reasonable representations from the purchaser as to such status); and
• certain other conditions in Regulation D are satisfied.

Purchasers in a Rule 506(c) offering also receive “restricted securities.” An issuer must file a Form D the same as under Rule 506(b). Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have authority to require notice filings and collect state fees.

Also, like Rule 506(b) offerings, Rule 506(c) offerings are subject to “bad actor” disqualification provisions.

Rule 504

A smaller offering exemption is contained in Rule 504 of Regulation D, which exempts from registration the offer and sale of up to $10 million of securities in a 12-month period. An issuer must file a Form D the same as under Rule 506(b). In addition, a company must comply with state securities laws and regulations in the states in which securities are offered or sold.

The following issuers are not eligible to use Rule 504: Exchange Act reporting companies; investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; and companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.

Regulation S

Regulation S under the Securities Act exempts certain offerings directed and sold outside the United States from Securities Act registration requirements.  Investors must be outside the United States or the transaction must be executed on a non-United States exchange with no “directed selling efforts” made in the United States.  There are three “tiers” of offerings under Regulation S depending on the type of issuer and security with varying offering and resale restrictions intended to address the risk such securities flow back into the United States.

Rule 144A 

Rule 144A under the Securities Act is not an exemption from registration per se but ordinarily operates as such. Rule 144A governs resales of securities. It is usually coupled with and immediately preceded by an exempt offering under Section 4(a)(2), the result of which is a private placement of securities to an initial purchaser (usually an investment bank), which resells the securities, which attain a certain degree of free tradability. The purchasers from the initial purchaser in a Rule 144A offering must be qualified institutional buyers (“QIBs”) pursuant to Securities Act Rule 144.  A Rule 144A transaction as above parallels the process used in an underwritten and registered public offering, and for marketing uses an offering memorandum similar to a prospectus that is used in a registered offering, except that such offering memorandum is not filed with or reviewed by the SEC, thus usually allowing for a faster offering process.

Regulation Crowdfunding

Regulation Crowdfunding under the Securities Act enables eligible issuers to offer and sell securities through crowdfunding. Regulation Crowdfunding:

• requires all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal;
• permits an issuer to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period;
• limits the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period; and
• requires disclosure of information in filings with the SEC and to investors and the intermediary facilitating the offering

Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Regulation Crowdfunding offerings are subject to “bad actor” disqualification provisions.

Regulation A

Regulation A is an alternative to the conventional registered offering under the Securities Act. Regulation A allows companies to offer and sell securities to the public, but with more limited disclosure requirements than what is required for publicly reporting companies.  In comparison to registered offerings, smaller companies in earlier stages of development may be able to use Regulation A to more cost-effectively raise money. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.

There are certain basic requirements applicable to both Tier 1 and Tier 2 offerings, including issuer eligibility requirements, “bad actor” disqualification provisions, disclosure, and other matters. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements and the filing of ongoing reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators.

Intrastate Offerings

Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.” This exemption seeks to facilitate the financing of localized business operations. To qualify for the intrastate offering exemption, a company must:

• be organized in the state where it is offering the securities;
• carry out a significant amount of its business in that state; and
• make offers and sales only to residents of that state.

The intrastate offering exemption does not limit the size of the offering or the number of purchasers. An issuer must determine the residence of each offeree and purchaser. If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost. Without the exemption, the issuer would be in violation of the Securities Act if the offering does not qualify for another exemption.

Rule 147 is considered a “safe harbor” under Section 3(a)(11), providing objective standards that a company can rely on to meet the requirements of that exemption. Rule 147, as amended, has the following requirements:

• the company must be organized in the state where it offers and sells the securities;
• the company must have its “principal place of business” in-state and satisfy at least one “doing business” requirement that demonstrates the in-state nature of the company’s business;
• offers and sales of securities can only be made to in-state residents or persons the company reasonably believes are in-state residents; and
• the company obtains a written representation from each purchaser providing the residency of that purchaser.

Securities purchased in an offering under Rule 147 limit resales to persons residing within the state of the offering for a period of six months from the date of the sale by the issuer to the purchaser. In addition, an issuer must comply with state securities laws and regulations in the state in which securities are offered or sold.

In addition, Rule 147A, which is substantially the same as Rule 147:

• allows offers to be accessible to out-of-state residents, so long as sales are only made to in-state residents; and
• permits a company to be incorporated or organized out-of-state, so long as the company has its “principal place of business” in-state and satisfies at least one “doing business” requirement that demonstrates the in-state nature of the company’s business.

Rule 701

Rule 701 exempts certain issuances of securities made to compensate employees, consultants, and advisors. This exemption is not available to Exchange Act publicly reporting companies. An issuer may sell at least $1 million of securities under this exemption, regardless of its size. An issuer may sell even more if it satisfies certain formulas based on the value or amount of the securities to be sold as compared to the value of its assets or on the amount of its outstanding securities. If an issuer sells more than $10 million of securities in a 12-month period, it is required to provide certain financial and other disclosure to the persons that received securities in that period. Securities issued under Rule 701 are “restricted securities” and may not be freely traded unless the securities are registered, or the holders can rely on an exemption.

Improper insider trading, by company directors, officers, and other “insiders”, is prohibited by Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder, as well as other federal statutes. Illegal insider trading occurs when a person buys or sells a security while in possession of material non-public information (so-called “MNPI”). The proscriptions against insider trading are designed to prevent corporate insiders from unfairly taking advantage of, and profiting from, their access to material non-public information. It should be noted that, absent violation of insider trading rules, insiders generally may trade securities in their own companies.

The SEC may pursue civil remedies against persons that have engaged in insider trading. Insider trading generally consists of either buying securities prior to the announcement of good news, such as unexpectedly high quarterly earnings, or a material company event such as a merger or a sale of major assets or selling securities prior the announcement of bad news, such as a decline in quarterly revenue.

In order to prove an insider trade has occurred, there must be an actual purchase or sale of a security, while “in possession of” MNPI, which calls into question the materiality of the information and whether such information is “publicly available.” The SEC has consistently taken the position that insider trading has occurred when these elements are present, even if there were other factors that may have been more important to the insider’s trading decision. The U.S. Supreme Court has held that information is “material” if there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions. Federal law also authorizes what are known as “treble” damages, amounting to fines of up to three times the amount of profits gained or losses avoided, and criminal prosecutions may be brought by the U.S. Department of Justice.

The insider trading laws also cover “tipping” others as to impending company announcements. For example, both a corporate insider (the “tipper”) and, for instance, his or her spouse (the “tippee”) may be guilty of violating U.S. securities laws if confidential information is shared between the two, resulting in profitable trades by the spouse.

Further, misappropriating information from an employer and trading securities (of either the employer or its competitor) on that information may constitute insider trading. Similarly, employees of third parties, such as banks, law firms, or other agents of an issuer that have access to MNPI in the course of its business with the issuer, through providing services to the company, and then trade securities based on that knowledge, may be subject to insider trading violations. Violations of insider trading rules by insiders of a company may result in the liability of the company on various theories, including a failure to protect the information of the company or to impose proper or required governance policies.

To reduce the risk of insider trading by its insiders, companies typically adopt insider trading policies.  These policies are often more stringent than applicable law.  For example, these policies often include:

• prescribed periodic trading “blackouts” imposed by a company on insiders prior to the public disclosure by the Company of all MNPI, which periodic blackouts normally precede periodic press releases relating to results of operations and financial condition for a preceding operating period;
• event-driven ad hoc blackouts imposed by management in the event of the occurrence of MNPI, which blackout may be imposed on all or a portion of a company’s insiders, depending on the access to the MNPI;
• pre-clearance procedures for directors and officers to trade in the company’s securities; and
• guidelines for adopting safe-harbor trading plans by individual directors and officers that, if properly structured, create a presumption that trades were not based on MNPI.

Both the Securities Act and the Exchange Act provide basic liabilities upon which an investor may bring a legal action. The remedies created under other federal securities laws generally are based in substance on the provisions of these two statutes.

Securities Act Provisions

Section 11 of the Securities Act creates a private right of action for purchasers of securities based on the contents of a registration statement filed with the SEC in connection with a public (non-exempt) offering. Thereunder, purchasers may sue if the registration statement contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless the purchaser knew of such untruth or omission at the time of the purchase. Under Section 11, the following persons may be liable: the issuer; the directors of the issuer; the persons named in the registration statement as planning to become directors of the issuer; and every other person who signs the registration statement. A Section 11 plaintiff does not need to establish a defendant’s scienter (i.e., an intention or knowledge of wrongdoing) or even negligence, to prove the case. Although an issuer has almost no defenses under Section 11(a) and is strictly liable for material misstatements and omissions in registration statements, other defendants have a variety of defenses (with the defendant bearing the burden of proof) under Section 11. In almost all such cases, a plaintiff is not required to show specific reliance on the applicable statements in registration statement to recover under Section 11. Generally, the amount of damages in such a claim is the decrease in the value of the applicable securities, which is calculated as the difference between the price at which the securities were bought and the price at which the securities were sold, if the securities were sold before suit was filed, or the price as of the date the suit was filed, if the securities are still held as of that date, and a plaintiff need not show that such decrease was “caused” by a material misstatement or omission in the registration statement. There is no cap on the amount of such damages, except in the case of underwriter defendants. As to time limitations on a claim, actions under Section 11 must be brought within one year from the time of discovery of the untrue statement or omission, or from the time such discovery should have been made by the exercise of reasonable diligence, and in no case more than three years after the security was first offered to the public.

Section 12(a)(1) under the Securities Act provides that any person who offers or sells a security required to be registered under the Securities Act that is not so registered is liable to the purchaser of that security. Section 12(a)(2) under the Securities Act provides that any person who by use of any means of interstate commerce offers or sells a security on the basis of a materially false or misleading prospectus or materially false or misleading oral statements is liable to the person purchasing from him, unless he can show that he did not know, and could not in the exercise of reasonable care have known, of the falsehood or omission. With certain exception, Section 12 operates in much the same manner as Section 11.

The basic difference between Section 11 and Section 12 is that the former holds liable the persons responsible for a false or misleading registration statement for damages to any and all purchasers regardless who the seller was, whereas Section 12 allows, if the seller itself used a false or misleading prospectus or false or misleading oral statements in making a sale, the purchaser to either rescind the purchase or to get damages from the seller if the securities are no longer held.

Exchange Act Provisions

Section 10(b) under the Exchange Act prohibits the use of manipulative or deceptive devices in contravention of rules prescribed by the SEC. Section 10(b) applies to all securities transactions. Section 10(b) requires the SEC to prescribe rules to implement it. The most important such rule is the general antifraud rule, Rule 10b-5. Rule 10b-5 prohibits use of any means of interstate commerce to employ any device, scheme, or artifice to defraud, make material misstatements or omissions, or engage in any course of business that operates as a fraud against any person, in connection with the purchase or sale of any security. In general, to prevail on a Rule 10b-5 claim, a plaintiff must prove that the defendant made a false statement or an omission of material fact with scienter in connection with the purchase or sale of a security, upon which the plaintiff reasonably relied, and which proximately caused the plaintiff’s harm. Rule 10b-5 can be enforced by the SEC in injunctive and civil penalty actions, including actions by the Justice Department in imposing criminal liability for willful violations of the Exchange Act. In addition, courts have also allowed a private right of action under Rule 10b-5. Rule 10b-5 liability may be imposed on any person who made the statement alleged to be materially false or misleading and a defendant need not have purchased or sold securities; a defendant’s conduct must only have occurred “in connection with” purchases or sales of securities. Rule 10b-5 is a general antifraud rule broadly prohibiting a wide range of conduct, including fraud between purchasers and sellers, false or misleading statements of material fact by insiders or others that affect a security’s trading price, or insider trading on MNPI as discussed above.

General

The foregoing statutory remedies are in addition to the various contractual remedies that would be available in a securities offering, including under applicable underwriting agreements (in the case of an underwritten public offerings), initial purchaser agreements (in the case of a Rule 144A offering), specific other securities purchase agreements (in the case of private placements) and other debt and collateral documentation and the rights and remedies thereunder available to debt holders in the event of defaults and bankruptcy proceedings.

The year 2023 was a challenging one for both the equity markets and the debt markets in the United States.  Uncertainty continues as to the direction of influential interest rates and the course of related inflation. Interest rates appear to have stabilized, and rates and inflation are predicted to abate during 2024. Accordingly, in 2024, if interest rates stabilize and economic conditions generally improve, the number of equity offerings likely will increase. This increase seems to be predicted by the preceding relative absence of market liquidity and valuations and perhaps the consequent pent-up demand for access to public market capital. In that context, it seems that private equity firms have accumulated IPO prospects to come to market. Thus, it is generally believed that the outlook for 2024 IPO offerings is positive and thus far has already since 2023. Follow-on equity offerings may be less predictable and more circumstantially related to individual capital needs in the context of continuing historically high interest rates. Debt capital markets, on the other hand, may be more directly impacted by high interest rates, with recent refinancings off in volume and activity for that reason. If interest rates decline, as expected, then a proportional increase in volume and activity of the debt capital markets is to be expected.

The SEC and other United States regulators have not recently promulgated any regulations that would likely discourage accessing either the equity or debt capital markets. However, it should be noted that such regulation is at least partly to blame for the near disappearance of the SPAC boom, during which in many cases SPACs were chosen over traditional underwritten IPOs. While there are no indications that SPACs will return any time soon, there is evidence that issuers may seek other non-traditional offering formats, such as direct listings that result in “public” status. In direct listings, the issuance costs may be expected to be less, and the pricing perhaps more efficient, as brokers price and sell directly to purchasers on behalf of the issuers without the intermediation of a traditional underwriter. Direct offerings have not yet emerged as a popular format, though they and/or other alternative transactions may have increased attractiveness as the equity markets improve.

The two principal exchanges for listing in the United States are the NYSE and Nasdaq. The NYSE has three different tiers for listing: the NYSE itself, NYSE American for small-cap companies, and NYSE Arca that is fully electronic for exchange traded products. Similarly, Nasdaq has three separate tiers: The Nasdaq Global Select Market, The Nasdaq Global Market and The Nasdaq Capital Market. The initial financial and liquidity requirements for the Nasdaq Global Select Market are more stringent than those for the Nasdaq Global Market and the initial listing requirements for the Nasdaq Global Market are more stringent than those for the Nasdaq Capital Market. Corporate governance requirements are the same across all Nasdaq market tiers.

Before a company’s stock can begin trading on an exchange, the company must meet certain minimum financial and non-financial requirements, or “initial listing standards.” Initial listing standards generally include a company’s total market value and stock price, and the number of publicly traded shares and shareholders of the company. A principal consideration behind the listing standards is to ensure sufficient size and volume to permit a minimum amount of liquidity and efficient pricing of the shares. Once listed on an exchange, a company must continue to meet various financial and non-financial requirements, or “continued listing standards.” Continued listing standards are similar to initial listing standards but include additional requirements, including corporate governance matters. If a company fails to meet these continued listing standards, the exchange may remove or “delist” the company’s stock from the exchange. The details of the quantitative and qualitative listing requirements are beyond the scope of this report but are easily accessible online at the exchanges’ websites.

For foreign private issuers (or “FPIs”), the exchange listing standards are substantially relaxed. In addition, pursuant to SEC Rule 12g3-2(b), FPIs whose securities are traded on a non-U.S. exchange may be able to have their shares traded in the U.S. over-the-counter market without registration under the Exchange Act.  Under this exemption, an issuer must maintain a listing of its equity securities in its primary trading market outside the U.S. and file certain information with the SEC that is published by the issuer in its home jurisdiction pursuant to applicable requirements there. Similarly, certain Canadian issuers are able to rely on the Multijurisdictional Disclosure System, which allows eligible Canadian issuers to register securities under the Securities Act and Exchange Act using documents prepared largely in accordance with Canadian requirements.

Dual or super voting capital arrangements are permitted for U.S.-listed companies, subject to significant limitations. These arrangements have implications and limitations under both federal securities law and related exchange rules as well as applicable state (e.g., Delaware) law.

Each of Nasdaq Rule 5635(d) and NYSE Rule 312.03(c) requires stockholder approval of any issuance of 20% or more of the shares (or securities convertible into or exercisable for shares) or voting power outstanding prior to the issuance, in any transaction other than a public offering, that is for less than the lower of: (i) the closing price of the common stock immediately preceding the transaction; or (ii) the average closing price of the common stock for the five trading days immediately preceding the transaction. These 20% shareholder voting protection rules may be avoided by certain foreign private issuers that have qualified for exemption based on compliance with its local country governance and corporate requirements.  The foregoing would impact the ability of a company to issue super voting shares.

More directly, each of Nasdaq Rule 5640 and NYSE Rule 313.00 provides that the voting rights of the holders of outstanding listed shares may not be disproportionately reduced or restricted through any corporate action or additional issuance, including as the result of the issuance of super voting shares. In effect, these rules prohibit any issuance of super voting shares that would impact the relative voting power of existing stockholders.  In addition, a company must consider its constituent documents to ensure that it may issue any super voting shares.  These documents may contain limitations on the voting rights that may be given to any super voting shares and also may set forth terms of outstanding or other shares that would prohibit the issuance of super voting shares. Lastly, the issuance of super voting shares may constitute a breach of the fiduciary duties of directors and management and should be considered in the context of those duties under applicable state law.

Super voting shares in any form represent a well-known device used to implement or cement corporate control, usually to founders or other large shareholder groups. Such concentration of voting power has obvious implications for other shareholders. As a result of the listing rules noted above and other considerations, and the obvious disproportionate control resulting from super voting shares, most companies with such shares implement them prior to listing on an exchange. Thus, it was not uncommon in recent IPOs, particularly IPOs during the last few years in the technology space and/or IPOs that were accomplished through de-SPAC mergers. The extent of pre-IPO disparate treatment can be seen in extreme cases such as the IPO of Snap, Inc. in 2017, in which ordinary shareholders received no voting rights whatsoever, which rights were reserved to a preset control group. The trend of disparate pre-IPO voting arrangements should be expected to continue (even in the absence of any new de-SPAC mergers).  Further, aside from market and valuation pushback against these pre-public structures, companies with IPOs usually impose a sunset (often from three to five years and up to seven years) on the duration of the super voting shares to ensure they do not survive forever. In addition, the proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) negatively view companies with unequal voting rights and multiclass structures as not in the best interests of outstanding shareholders. ISS generally will recommend withholding votes or voting against directors individually, committee members or the entire board, while Glass Lewis generally recommends voting against the chair of the governance committee, when a company employs a capital structure with unequal voting rights.

Special purpose acquisition companies (“SPACs”) are well accepted in the United States and proliferated over the past five years, until market conditions and targeted regulations combined to effectively end the fad. SPACs are still legally and practically allowed, but they currently are rare and most activity in the area relates to winddowns and restructuring. As evolved in the United States, a SPAC is a publicly traded shell company (without any operating business) formed through an initial public offering and, often, a simultaneous private placement, most of the funds of both of which are deposited into a trust account, the stated existential purpose of which is to find a target with which to merge (a “de-SPAC Merger”) within a given time frame, usually one to two years. As a result of the de-SPAC Merger, the target effectively completes its initial public offering. The SPAC’s IPO typically consists of units, each consisting of a share of common stock and a warrant (or a fraction thereof), which is exercisable only upon the completion of the de-SPAC.

Although both the NYSE and Nasdaq, to protect the SPAC IPO investors pending a de-SPAC, require that at least 90% of the proceeds from the IPO be placed into a trust account that is inaccessible to the SPAC until such de-SPAC, typically all such proceeds are so entrusted. Consequently, the sponsors of the SPAC typically will fund most SPAC costs and take risk that the SPAC IPO and a subsequent de-SPAC will be completed. Both the NYSE and Nasdaq also have a requirement  that the de-SPAC have an aggregate fair market value of at least 80% of the value of the assets held in the trust account. Generally, the NYSE requires at least $100 million in market capitalization, whereas Nasdaq only requires at least $50 million in market capitalization.

The exercise price for the SPAC warrants is usually 15% above the IPO offering price with structural anti-dilution adjustments for splits and dividends. The warrants become exercisable on the later of 30 days after the de-SPAC and the first anniversary of the completion of the IPO. The public warrants require cash exercise, rather than cashless (or net) exercise, whereas the sponsor (or founder) warrants may be cashless.

SEC regulations also prevent a SPAC from identifying targets before the closing of its IPO. If the SPAC had a specific target under consideration at the time of the IPO, SEC rules would require extensive and detailed information regarding the target, including the target’s financial information, thus eliminating the advantage of a relatively fast capital raise offered by the SPAC as compared to a conventional IPO. Often, a SPAC will identify a market sector or an industry of targeted interest, without naming a target, which approach allows for marketing while avoiding the foregoing prohibition. The extensive disclosure rules governing a SPAC IPO include in particular disclosure regarding conflicts of interest relating to the sponsors, directors, and underwriters, and the compensation of all parties involved, including any deferred or contingent compensation.

The NYSE and Nasdaq permit a time frame of up to three years up to complete the de-SPAC, and United States SPACs typically commit to complete their de-SPAC within 18 to 24 months after their IPO. Automatic extensions may be included in the SPAC’s charter, subject to certain factual milestones or documentation. In the event such an extension is requested, then at the same time shareholders are permitted an opportunity to redeem their shares for the return of their proportionate share of the trust account. SPAC shareholders generally have the right to redeem their shares in connection with the de-SPAC transaction, without regard to whether the shareholders vote to approve the de-SPAC transaction. The redemption offer does not apply to the public warrants.

In the United States, the de-SPAC shareholder approval process is the same as that of any other public company merger, with the buyer (the SPAC) typically required to obtain shareholder approval, which must be obtained in accordance with SEC proxy rules, to the extent applicable, while the private target business is not required to comply with any SEC proxy process. Neither NYSE nor Nasdaq rules require a vote by the SPAC shareholders to approve a de-SPAC, but the structure of the de-SPAC transaction (based on entity domicile among other things) may require such a vote, as would the issuance of more than 20% of the voting stock of the SPAC in the de-SPAC transaction. Any such shareholder vote requires the filing of a proxy statement with the SEC, review and comment by the SEC, mailing of the proxy statement to the SPAC’s shareholders and holding a shareholder meeting, all of which may be expected to require 90-120 days.

In January 2024, the SEC adopted new rules designed to increase disclosures and provide additional investor protection in SPAC IPOs and de-SPACs. The new rules are considered to have had a chilling effect on the SPAC market. The new rules require, among other things, enhanced disclosures about conflicts of interest, SPAC sponsor compensation, dilution, and other information that the SEC deemed important to investors in SPAC IPOs and de-SPAC transactions. The new rules also require registrants to provide additional information about the target company to investors that the SEC believes would help investors make more informed voting and investment decisions in connection with a de-SPAC transaction. The new rules more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. For example, in certain situations, the new rules require the target company to sign a registration statement filed by a SPAC in connection with its de-SPAC transaction, thus making the target company a “co-registrant” that assumes responsibility for disclosures in that registration statement.  Importantly, the new rules also make the Private Securities Litigation Reform Act of 1995 safe harbor from liability for forward-looking statements unavailable to SPACs. The new rules also include disclosure requirements related to projections, including disclosure of all material bases of the projections and all material assumptions underlying the projections.

As discussed above, under the Securities Act all securities offered or sold to the public in the United States must be registered by filing a registration statement with the SEC. The prospectus is the narrative portion of the registration statement that is used as the offering document to market the subject securities. The Securities Act imposes liability for material misstatements or omissions in a registration statement, prospectus, or related oral communication.  A plaintiff does not have to demonstrate reliance on the false or misleading statements or that the defendant intended to deceive purchasers.

Pursuant to Section 11 of the Securities Act, the issuer, each person that signs the registration statement, every director at the time the registration statement is filed, the underwriters, the persons named as experts in the registration statement, and any controlling persons of the foregoing parties may be liable to investors for any untrue statement of a material fact in the registration statement or any omissions of a material fact necessary to make the statements in the registration statement not misleading. A fact is “material” if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy the securities being sold. Section 11 does not require a plaintiff to prove reliance on a material misstatement or omission, except a plaintiff who purchased the securities more than one year after the offering. Section 11 also does not require a plaintiff to prove scienter (which is an intent to mislead).

In addition, although Section 11 is the most common basis for claims relating to IPOs, claims also may be made under Section 12, which applies only to certain sellers in the IPO, such as a selling shareholder, or Section 15, which allows persons with the power to direct the issuer to be liable as “controlling persons” for Section 11 or Section 12 violations.

Under Section 11, an issuer is strictly liable for any material misstatement or omission in the registration statement and prospectus and thus has very little defense for such misstatements or omissions.  Other defendants, however, may have the so-called “due diligence defense” against such claims under Sections 11, 12 and 15 if they can demonstrate that they neither knew nor should have known of the material misstatements or omissions. This defense allows defendants other than the issuer to avoid liability if they can demonstrate that they conducted a reasonable investigation in connection with preparing the registration statement. This defense would be based on the factual circumstances of the defendant, their role in the transaction and the nature of the pertinent statements or omissions.

Most minority shareholder protections are contained in applicable state law, rather than at the SEC or any other federal level. The Securities Act and Exchange Act function mostly on a disclosure-based system, whereas substantive protections, such as those for minority shareholders, are at the state level. At the SEC level, there are such rules as SEC Rule 14a-8, which allows minority shareholders to submit proposals for inclusion at company shareholder meetings, exchange rules protecting such shareholders and numerous rules imposing disclosure requirements to inform such shareholders.

Most minority shareholder protections, however, occur at the state level. Since most United States public companies are listed in Delaware, it is worth reviewing the protections therein. It is important to note, however, that FPIs listed in the United States are eligible for exemption from most of the SEC proxy and exchange listing requirements that protect minority shareholders, allowing FPIs to comply only with their home jurisdiction laws, but subject to certain additional U.S. reporting obligations as to compliance therewith. In Delaware, most such protections are statutory and, in some cases, can be waived or opted-out by companies. Basic Delaware protections include:

• Voting rights requiring that certain extraordinary transactions (including mergers and other transactions resulting in a change of control, or a sale of all or substantially all their assets) be approved by a minimum percentage of all outstanding shares (typically a majority thereof);
• Fiduciary protections in transactions involving related parties requiring approval by fiduciaries who are disinterested in the transaction. Those fiduciaries must devote appropriate time, attention, loyalty, good faith, and care to such transactional decision-making, including obtaining expert advice (such as valuation and/or fairness) where appropriate, although outside of such contexts there is much less that statutorily protects minority shareholders per se. It is noteworthy that there is no formal law requiring that majority shareholders in their capacity as such owe any specific fiduciary duties to minority shareholders, and Delaware courts have expressly rejected such a contention.
• Opportunities for remedies, including a well-developed body of protective legislation and case law, a sophisticated judiciary and relative ease in bringing litigation to address claims; and
• Indirect statutory protections including limitations on classified boards, cumulative voting, contractual commitments compromising fiduciary duties, and meeting quorum requirements, among others.

Note that, unlike in many non-United States jurisdictions, Delaware does not offer statutory pre-emptive rights that might allow existing shareholders to participate in any securities offerings and thus protect or maintain their percentage ownership. Similarly, rights of first refusal, tag-along rights, drag-along rights, and anti-dilution protections, shareholder blocking or consent rights, and similar provisions, all of which may disproportionately impact minority shareholders or the preservation of minority shareholder status, are not statutorily imposed in Delaware and may only be contractually created.

The NYSE and Nasdaq also have numerous rules the effect of which is to protect the interests of minority shareholders, including requirements for board and committee independence; requirements for shareholder approval in the event of certain new issuances of shares (particularly where such issuance would result in a change of control or the issuance of 20% or more of shares in business acquisition or at below market prices); the adoption of polices governing the conduct of insiders; and similar protections, some of which may be inapplicable to FPIs as discussed above.

The SEC will not normally review transactions by listed companies unless the transaction triggers a specific filing requirement. Almost all such transactional filings are carefully reviewed and receive commentary from the SEC that must be resolved before the transaction may proceed. In addition to this transaction-specific review, the SEC regularly reviews an issuer’s periodic reports, particularly its annual reports on Form 10-K and its annual proxy statements and may comment on the descriptions of transactions and other information (particularly financial and accounting matters) contained therein. Being subject to transactional filings often has an impact on securities offering planning. For example, an intermediated securities offering, especially in the debt capital markets, can be in the form of a registered offering or a Rule 144A offering. Each usually has an investment bank underwriting/placing the offering. In the registered context, a registration statement (typically on short-form Form S-3) would be filed with the SEC, which may take up to 30 days to generate its first round of comments (although on occasion the SEC will notify the issuer within a week or so that it has decided not to review the filing, in which event the offering may proceed without delay). Alternatively, no filing with the SEC of any kind is required in launching a Rule 144A offering, thus avoiding any delay and SEC scrutiny.

Transactions by public companies that require SEC filing and that are thus subject to SEC review include (in addition to securities offerings as discussed above) transactions requiring shareholder approval, such as mergers, sales of substantially all assets or the amendment to an issuer’s constituent documents. Transactions subject to shareholder approval ordinarily require a shareholder meeting. The SEC often requires the filing of a so-called “preliminary proxy statement” for its review prior to the use of a final proxy statement. Other transactions triggering such a filing and possible review include contested shareholder voting on certain significant matters. The SEC rules effectively require a preliminary proxy statement in every matter submitted to shareholders for their approval other than for:

• The election of directors;
• The election, approval or ratification of accountants;
• A security holder proposal included pursuant to Rule 14a-8 (as noted above); or
• The approval or ratification of a compensation plan.

Outside the context of a transaction filing as above, the SEC also may review filings that disclose a transaction after the fact. For example, the filing of a current report on Form 8-K is used to promptly report the occurrence of specified material events, such the entry into a definitive material agreement. Such filings often trigger market reaction and potential challenges. Such challenges by the public or the SEC may include lawsuits and communications with the SEC, or objections by the applicable securities exchange, any of which may also react directly to a Form 8-K.

United States federal securities regulation does not necessarily prevent related party transactions. Rather, that regime is disclosure-oriented and most such regulation relates to the content and timing of required disclosure rather than merit-based standards of fairness or advice. In this regard, the interplay between the applicable governing state law and the federal securities law usually results in an effective regulatory mechanism. For example, in the event of a merger or similar transaction in which a related party has a commercial or similar special interest, to the extent that state law requires a shareholder vote, then the solicitation of proxies for the meeting for such vote will be subject to strict compliance with the SEC proxy rules. Those rules, which are extensive and robust, are heightened in the context of a related party transaction. For example, if such transaction has an affiliate with any such interest and involves the company “going private,” (i.e., delisting and or deregistering) then the basic disclosure rules will be supplemented with detailed disclosure regarding the interests of the affiliate as required by SEC Rule 13e-3. If that rule applies, the transaction is subject to heightened disclosure requirements and certain waiting period requirements. As noted, the Rule 13e-3 requirements are separate from and overlay the applicable state law governing the transaction. That heightened disclosure increases the likelihood of litigation, which is common in such transactions, and often flags many facts that may be attacked in such litigation.

In addition to transactional considerations, the SEC also has rules that govern the regular periodic disclosure of less extraordinary matters that involve related parties. Item 404(a) of Regulation S K centralizes and sets forth the standards for disclosure of related person transactions. Item 404(a) requires that a company must provide detailed disclosure regarding:

• Any transaction since the beginning of the company’s last fiscal year, or any currently proposed transaction;
• in which the company was or is to be a participant;
• in which the amount involved exceeds $120,000; and
• in which any related person had or will have a direct or indirect material interest.

For purposes of the foregoing, the rule requires the disclosure of the following information regarding the transaction:

• The name of the related person and the basis on which the person is a related person;
• The related person’s interest in the transaction, including the related person’s position or relationship with, or ownership in, another entity that is a party to, or has an interest in, the transaction;
• The approximate dollar value of the amount involved in the transaction;
• The approximate dollar value of the amount of the related person’s interest in the transaction, computed without regard to profit or loss;
• In the case of indebtedness, disclosure of various principal and interests amounts; and
• Any other information regarding the transaction or the related person in the context of the transaction that is material to investors in light of the circumstances of the particular transaction.

The foregoing disclosure must be included in quarterly reports as well as annual reports and any proxy materials relating to an annual or transaction-required shareholder meeting.

In addition, federal law in SEC Regulation S-X, Rule 1-02(u) provides an additional source of disclosure with a separate definition of “related party” triggering financial disclosure that aligns with United States GAAP, which will require related party disclosure on a separate basis.

Any shareholder that acquires beneficial ownership of more than 5% of any class of shares of a public company and who has the purpose or effect of changing or influencing the control of the issuer must file a Schedule 13D with the SEC pursuant to Section 13 of the Exchange Act.  The Schedule 13D contains information about the shareholder, the shares purchased, and relationships with the company.  In particular, the Schedule 13D will contain detailed disclosure as to the holder, recent transactions in the issuer’s securities (including the timing and prices thereof), and agreements (which must be filed as exhibits) relating to such ownership. In February 2024, the SEC adopted revisions to the Schedule 13D rules requiring that the initial Schedule 13D be filed within five business days after acquiring such 5% ownership. The Schedule 13D must be amended “promptly” to report any material change in the information provided, including any acquisition or disposition of 1% or more of the class. Its ongoing amendment obligations and detailed disclosure make a 13D a rich source of information regarding the reporting persons.

To avoid the burdens, cost and degree of disclosure required in a Schedule 13D, 5% holders will usually seek to instead file a Schedule 13G, or short form, whenever possible. If a holder acquires the shares in the ordinary course of business and does not have the purpose or effect of changing or influencing the control of the issuer and qualifies as an eligible filer, it may file a Schedule 13G instead of a Schedule 13D. Such eligible filers are deemed qualified institutional investors and include certain securities brokers, banks, insurance companies, SEC-registered investment companies, employee benefit plans, and other institutions.

The recent amendments to these rules have clarified that an amendment to a Schedule 13D must be made within two business days after the date on which a material change to the disclosure occurs whereas an amendment to a Schedule 13G ordinarily need only be filed by the 45^th day after the end of each calendar quarter.

The Schedule 13D/G rules apply in full to all persons regardless of the nationality or residence of the holder and regardless of the United States or FPI status of the issuer.

In addition to the foregoing Schedule 13D/G disclosure, a separate set of rules, adopted pursuant to Section 16 of the Exchange Act, requires directors, officers, and beneficial owners of more than 10% of the shares of a public company to publicly disclose ownership and transactions in the company’s securities. This disclosure is designed to facilitate enforcement against those holders who may have a so-called “short-swing profit,” which is any deemed profit that might be computed by matching any sale with any purchase within six months of each other, whether actual or deemed (regardless of which transaction happened first and calculated to maximize the short swing profit). The owner is required, on a no-fault basis, to disgorge 100% of all short-swing profit to the issuer (net of significant plaintiff counsel fees that incentivize lawyers to monitor filings and bring claims on behalf of all shareholders). The filings disclose on a prompt basis every purchase and sale, and any deemed purchase and sale, by the owner in the issuer’s equity securities. Section 16 then requires disgorgement of all such profits resulting from buying and selling (or selling and buying) such securities within any six-month period.  The initial Section 16 ownership filing is made on Form 3 within ten days of becoming a reporting person and then each amendment must be filed within two business days after each further purchase or sale.  It also prohibits short sales and hedging the company’s securities.  An initial filing on Form 3 must be made within 10 days of becoming a Reporting Holder, and subsequent transactions in the company’s securities typically must be reported on Form 4 within two business days.  Unlike for the Schedule 13D/G rules, the Section 16 rules, including the filing requirements and the profit disclosure, do not apply with respect to owners of the securities of FPIs.

As noted above, federal securities laws, as a disclosure-based regime, do not require shareholder approvals. Those requirements typically are a matter of state law and the rules of the NYSE and Nasdaq. The listing requirements for the NYSE and Nasdaq require shareholder approval of the following transactions:

• The issuance (or deemed issuance pursuant to convertible or exercisable securities) of 20% or more of the outstanding shares or share votes of an issuer at a price below a specified minimum price (based on market price);
• The issuance (or deemed issuance pursuant to convertible or exercisable securities) of 20% or more of the outstanding shares or share votes of an issuer in connection with an acquisition;
• Adopting or amending certain equity compensation plans;
• Certain issuances of securities to related parties; and
• Issuances of securities that will result in a change of control of the company.

In addition, as noted above, state laws ordinarily apply (and are reflected in constituent documents) that require shareholder approval of certain extraordinary corporate transactions.

There is no U.S. federal securities law requiring a mandatory tender offer.  If a person or group voluntarily commences a tender offer or if an issuer voluntarily commences a self-tender offer, extensive rules govern how the tender offer must be conducted and the disclosure and liability regime in connection therewith.

There are several bases for requiring the presence of independent directors at an issuer, including SEC regulations, NYSE and Nasdaq listing requirements, and the laws of the home state of the issuer. In addition, although not having the force of law, the governance standards required by the independent proxy advisors such as ISS and Glass Lewis also present such requirements.

The SEC and exchange listing rules apply principally to the composition of the listed company’s board and certain committees thereof. Those composition requirements are set forth in specific rules and include that, with limited exceptions, each board must have a majority of independent directors and each of the audit committee and compensation committee must be comprised entirely of independent directors, the definitions of which vary slightly for each purpose.  The applicable independence tests are designed to ensure that directors will exercise autonomous judgment. Such independence basically requires that a director not hold a management position at the company, its parents or subsidiaries, and that former executive officers are subject to a three-year lookback from a particular measurement time. Further, a director is not independent if they or their families received more than $120,000 in compensation from the company in any year during the prior three years.

Applicable Delaware law governing director independence typically relates to extraordinary transactions involving an insider or controlling shareholder, where approval by independent outside directors is required to ensure fairness and compliance with fiduciary duties, all as mostly established under case law as a result of litigation. Delaware case law generally finds independence to be absent where self-interest is in play or where related parties are involved, presenting potential conflicts of interest.

The proxy advisory firms ISS and Glass Lewis in some instances have additional, heightened standards of independence for directors. For example, ISS does not recognize the independence of a director that formerly was the chief executive officer of the issuer, regardless of time passage, and uses a five-year (rather than three-year) lookback for other former executive officers.

An FPI may rely on home country rules regarding most governance, including the presence of independent directors, provided that an FPI must have a fully independent audit committee.

For public offerings in the United States the following are required, subject to certain exceptions. (i) audited balance sheets as of the end of the two most recent fiscal years and, if the issuer has been in existence less than one year, an audited balance sheet as of a date within 135 days of the date of filing the registration statement; and (ii) audited statements of comprehensive income, cash flows, and changes in stockholders’ equity covering each of the three most recent fiscal years, or for the life of the issuer, if shorter. The audited financial statements must be accompanied by an audit report issued by independent public accountants that are registered with the Public Company Accounting Oversight Board (the PCAOB) under standards promulgated by the PCAOB.

For interim financial statements, the following are required: (i) an interim unaudited balance sheet as of the end of the most recent three, six, or nine-month period following the most recent audited balance sheet; and (ii) interim unaudited statements of comprehensive income, cash flows, and changes in stockholders’ equity for any part-year period covered by an interim balance sheet, together with statements of comprehensive income, cash flows, and changes in stockholders’ equity for the corresponding such period of the prior year. Notwithstanding the foregoing,  an “emerging growth company” (“EGC”) may conduct its initial public equity offering using two years, rather than three years, of audited financial statements. To be an EGC, a company must have annual revenue for its most recently completed fiscal year of less than $1.235 billion.

United States domiciled companies must file financial statements with the SEC in accordance with US GAAP. The financial statements of foreign private issuers, however, may be prepared using US GAAP, IASB IFRS, or local GAAP. In the case of foreign private issuers that use IASB IFRS, no reconciliation to US GAAP is needed. If non-IASB IFRS or local GAAP is used, however, a note to the consolidated financial statements (both annual and required interim statements in the applicable prospectus) must include a reconciliation to US GAAP.

Typically, a registration statement must include the financial statements described above as of the date of filing (as the date of measurement), provided that EGCs registering with the SEC for the first time may submit draft registration statements for confidential (non-public) review, and thus protected from disclosure under the United States Freedom of Information Act. Even if compliant at the time of filing, during the SEC review process such financial statements may become non-compliant age-wise (“stale”) and thus need to be brought down to compliance before the next filing thereof. In the event of such imminent staleness, an issuer that is an EGC may omit from its confidential submissions any annual and interim financial data that it reasonably believes will not be required at the time of the offering.

Staleness rules, the details of which are based on an issuer’s size and other circumstances, generally provide that an issuer may not use annual financial statements older than 15 months nor interim unaudited financial statements within the most recent 135 days of filing (which period generally is 129 days for certain large filers).  FPIs, however, may use annual financial statements that are no older than 12 months unless the FPI is already listed on another exchange.

Environmental

Prior to March 6, 2024, the SEC had not historically required ESG disclosures.  On that date, however, the SEC adopted rules designed to enhance public company disclosures related to the risks and impacts of climate-related matters. The new rules include disclosures relating to climate-related risks and risk management as well as the governance of such risks. In addition, the rules include requirements to disclose in the audited financial statements the financial effects of severe weather events and other natural conditions. Larger registrants will also be required to disclose information about greenhouse gas emissions, which will be subject to a phased-in assurance requirement.

In addition, notably, in 2023 California passed two laws that will require public and private companies that do business in California to disclose their greenhouse gas (“GHG”) emissions and their climate-related financial risks. The first law requires entities with annual revenues over $1 billion to disclose their GHG emissions to a reporting organization. Unless statutory timelines are delayed, regulated companies must commence disclosing their scope 1 and 2 emissions in 2026 and their scope 3 emissions in 2027. The second law requires entities with total annual revenues over $500 million to post their climate-related financial risks on their websites with a description of how they plan to reduce or adapt to those risks. These reporting requirements are set to take effect in 2026. Since these are laws focused on corporate disclosures, they will require reporting but are not prescriptive about actions companies should take relating to their GHG emissions or other practices. The laws apply to all such companies that “do business” in California, which standard is very easily met, thus covering contacts that might not ordinarily be considered sufficient for establishing submission to California law, including allowing regulation of businesses that operate wholly outside of California. These laws are being legally challenged on a variety of legal theories.

Social/Diversity

On August 6, 2021, the SEC approved Nasdaq’s listing standards to require board diversity disclosures for listed companies. Such rules provide that, subject to transition periods and limited exceptions, such companies will be required to (i) publicly disclose board-level diversity statistics on an annual basis using a standardized matrix template under Nasdaq Rule 5606 and (ii) have, or disclose why they do not have, a minimum of two diverse board members under Nasdaq Rule 5605(f).  Such Rule 5606 requires companies to disclose, in such a prescribed matrix: (i) the total number of company board members and (ii) how those board members self-identify regarding gender, predefined race and ethnicity categories and LGBTQ+ status. Certain foreign issuers, including FPIs, must disclose a similar matrix, but may apply a broader definition of diversity and report the number of individuals who self-identify as underrepresented in their home country jurisdiction based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity. In contrast to Nasdaq, the NYSE has not set any direct requirement for diversity, but instead has adopted a market-based approach, focusing on the power of networks between diverse individuals.

Institutional investors and proxy advisory services have increased focus on ESG matters in recent years, which has had a substantial effect on disclosure and behavior of public companies that generally exceeds the effects of the regulatory requirements.

In issuing debt securities, the issuer or the ultimate parent of the issuer typically acts as the direct issuer, with its subsidiaries often acting as guarantors. Where such parent is a holding company, the parent and operating company may be co-issuers or guarantees may be used to provide credit support for the issuer (either a parent guarantee of a subsidiary issuer or guarantees from material subsidiaries of a holding company issuer). SPV structures are not normally used in debt offerings, except in the project finance context, where the performance of the SPV’s specific project is designated as the sole source of payment.  An SPV issuance allows the debt offering to have a creditworthiness measured solely by the business and financial condition of the specific project rather than that of a consolidated ownership group.

An issuer must make numerous structuring decisions in connection with a debt offering, including the offering size, the maturity, and any covenants. The nature and content of such covenants typically depend on the issuer’s credit (e.g., investment grade or high yield), and related market standards. For example, investment grade debt often includes covenants that limit the issuer’s ability to grant liens or do sale‐leaseback transactions on properties of the issuer, unless the issuer has the credit strength and size to avoid these covenants. Other structuring decisions may include the determination as to any optional repurchase terms, including whether to pay a specified make‐whole premium representing the discounted present value of remaining interest payments, or to prepay at face value shortly before maturity. The debt also may allow investors to put the debt securities to the issuer in a mandatory repurchase after a specified date and at a specified price.

Trust structures are common with widely distributed debt securities in the United States. Pursuant to the Trust Indenture Act of 1940 (the “TIA”), a trust indenture is required where the debt is registered with the SEC. Where debt is not registered, no such trust is required. A trust structure also effectively separates the administration of the debt securities from the control of the issuer and places it with an independent agent. A trust structure also offers a well-established and conventional mechanism for dealing with numerous and disparate holders, including providing unified notices, distributions, claims, organization, and other services outsourced to a qualified, professional trustee. For this reason, some unregistered debt offerings also use a trust structure, although voluntary trust structures do not necessarily have to comply with the strictures of the TIA. The TIA to a great extent coordinates with the provisions of the Securities Act to protect rights of the debt holders, impose minimum obligations and duties on trustees and obligors, and confer on the trustee the powers and resources needed to meet obligations to investors. A trust must be qualified by the SEC as complying with the requirements of the TIA. The SEC functions under the TIA to ensure that the trustee is eligible and qualified as provided in the TIA and that the provisions of each indenture filed with it for qualification conform to the prescribed statutory standards.

A trust structure requires a trustee, which typically is an independent agency having the established resources, facilities, and qualified staffing to manage and administer widely held debt issuances. Most trustee services are administrative in nature where the trustee avoids substantive decision-making responsibility. Often a trustee is a banking institution with corporate trust services.  Trustees have fiduciary duties and contractual obligations, as well as the requirements of the TIA governing their conduct.

A trustee customarily acts as a paying agent, receiving payments from the issuer and distributing them to the debt holders. The trustee also acts in the capacity of a transfer agent, maintaining the books and records of the various debt holders.  Similarly, where deb it secured, the trustee will act as the collateral agent for purposes of perfecting security interests and, in the event of default, exercising remedies against the collateral.  The trustee must enforce the terms of an indenture in accordance therewith on behalf of the debt holders, including bringing claims and taking other actions as required or where authorized by the requisite vote of a specified percentage of such holders, including accelerating the debt where appropriate in accordance with the indenture.

Credit enhancements are often used in debt offerings in the United States. Which credit enhancements, if any, used in a particular offering is based substantially on the creditworthiness of the issuer (including the applicable rating), the nature and industry of the issuer, the form and substance of the debt security (e.g., unsecured, asset-backed, guaranteed, collateralized debt obligations, etc.), investor expectations and other marketing requirements, and other factors.  Such credit enhancements include parent and/or subsidiary guarantees, security interests in collateral, priority of payment ranking (e.g., senior vs. subordinated status), loan loss insurance (a private insurance product targeted to lenders), loan loss or debt service reserves (money set aside to ensure payments). Certain credit enhancements are more common only in the structured finance context and others, such as guarantees, security interests and ranking are more widely utilized. Letters of credit and keep-well deeds are not common in debt financings, except on occasion in small offerings or specialized asset-based transactions.

Which enhancements to deploy depends on a great number of factors. The vast number of corporate debt issuances use one or more of affiliate guarantees, security interests and ranking as credit supports. What combination thereof is almost entirely a function of the required rating and target market of the offering. There are no legal requirements or standards applicable to the deployment of credit enhancements, which are entirely a function of the facts and circumstances of the applicable offering.

The most common corporate debt offering credit enhancements are guarantees, where a parent and/or subsidiaries contractually commits to pay the underlying obligations; collateral security, in which the debt holders may go against the collateral to ensure payment; and ranking, where the obligations of senior debt will be paid before those of lower ranking debt. Note that with security interests in collateral, that security interest is usually “perfected” by counsel to ensure the investors’ priority of rights in the collateral as against future lenders and claimants. Such perfection is a local law matter requiring local filings that put future lenders and claimants on notice as to that security interest and priority. The submission of a debt structure to a rating agency is a critical event in the debt offering process. Rating agencies scrutinize the creditworthiness of the issuer and the security, including the applicable credit enhancements, if any.

Restrictive covenants vary based on the facts and circumstances of the issuer, the debt instrument, and the target investor market. Most investment grade debt contains only a few basic restrictive covenants. In recent years, covenant packages for investment grade debt have lightened up as a matter of industry practice.  So-called “high yield” (lower credit) debt, however, usually contains a customized package of typical covenants based on many factors, especially the industry of the issuer, including:

• Restricted Subsidiaries. Restricted subsidiaries are subsidiaries of which the net income and earnings before interest, tax, depreciation, and amortization (EBITDA) are included in calculating certain key compliance ratios and baskets contained in restricted payment, debt, and lien covenants. Restricted subsidiaries normally are all the subsidiaries of the issuer other than any subsidiaries that the issuer designates as unrestricted.
• Restricted Payments. A restricted payments covenant limits the amount of cash and other assets that are allowed to exit the credit package supporting the debt. Such restricted payments include cash distributions, such as dividends, equity repurchases, subordinated debt redemptions prior to maturity, and prohibited investments by the restricted subsidiary.
• Limitation on Affiliate Transactions. This covenant restricts the issuer and its restricted subsidiaries from engaging in transactions with affiliates unless those transactions are on terms no less favorable than would be available in similar transactions with unrelated third parties.
• Limitations on Indebtedness. This covenant limits the type and amount of debt the issuer may incur. These limitations may be in the form of a limit on the amount of additional debt that may be incurred based a ratio, which is usually a fixed charge ratio of EBITDA for the last four fiscal quarters to fixed charges, including interest and certain dividends of restricted subsidiaries. Often, a related “basket” of exceptions is included in the covenant as may be negotiated.
• Limitation on Asset Sales. Assets sales are not usually prohibited, as the credit package would not necessarily be impaired thereby. However, this covenant when applied allows the issuer or its restricted subsidiaries to use the proceeds of the subject debt offering to either prepay certain debt or reinvest in the issuer’s business within a certain time period. Where such proceeds are not so deployed, the issuer is ordinarily required to repurchase the debt rather than to otherwise use those proceeds.
• Limitation on Liens. Subject to certain common exceptions, a lien covenant (which is usually coordinated to the indebtedness limitation covenant) limits how much debt the issuer and its restricted subsidiaries can secure and what assets it can use as collateral.

Each person that has the control, receipt, custody, or disposal of a payment of U.S. source interest on a debt security is a withholding agent for U.S. federal income tax purposes and is responsible for withholding and remitting taxes (and information reporting) on such payment. Generally, if multiple parties are withholding agents, the last person in possession of such payment in the United States handles the withholding. Typically, that person is the issuer or paying agent. However, if the security is held through a depository (such as the Depository Trust Company), a broker or other intermediary typically handles the withholding.

Non-U.S. persons are generally not subject to U.S. income tax solely as a result of passively holding debt securities, but they are subject to U.S. federal nonresident withholding tax unless an exception applies. There are numerous exceptions, the portfolio interest exemption being most common. An interest payment may also be subject to FATCA withholding or backup withholding if the non-U.S. person fails to provide the necessary documentation to the withholding agent.

U.S. persons are subject to U.S. federal income taxes and generally must include interest in income, but they are not subject to U.S. federal nonresident withholding tax, FATCA withholding or backup withholding provided they supply the required documentation.

Nasdaq

Non-convertible corporate debt securities may be listed on the Nasdaq Bond Exchange, which is an electronic trading platform. Listing on the Nasdaq Bond Exchange requires the following:

• The issuer must have one class of equity security that is listed on Nasdaq or the NYSE (or its NYSE American);
• The issuer with equity securities so listed must directly or indirectly own a majority interest in, or be under common control with, the issuer of the non-convertible debt;
• The issuer with such equity securities so listed must have guaranteed the non-convertible debt; and/or
• A nationally recognized securities rating organization (“NRSRO”) must have assigned a rating to the non-convertible debt that is no lower than an S&P Corporation “B” rating or an equivalent rating by another NRSRO or, if no NRSRO has assigned a rating to the issue, an NRSRO must have currently assigned either an investment grade rating to an immediately senior issue or a rating that is no lower than an S&P Corporation “B” rating, or an equivalent rating by another NRSRO, to a pari passu or junior issue.

To maintain such a listing of debt, the debt must have a market value or principal amount outstanding of at least $400,000 and the issuer must be able to meet its obligations on the listed debt. The failure of the debt to meet the $400,000 public float requirement for a period of 30 consecutive business days will constitute a deficiency, following which Nasdaq would notify the issuer of this deficiency and the issuer would have 180 days to regain compliance. On the other hand, failure by an issuer to meet its obligations on the debt, as determined by Nasdaq, would result in immediate suspension and the commencement of delisting proceedings.

The NYSE also allows the listing of non-convertible debt securities. Such debt would be listed on the NYSE’s Automated Bond System^®, which is an electronic trading platform. The NYSE requires that the market value or outstanding principal amount of debt securities be at least $5 million and will delist the debt if that amount is less than $1,000,000. In addition, listing on the NYSE requires the following:

• The issuer of the debt security has equity securities listed on the NYSE;
• an issuer of equity securities listed on the NYSE directly or indirectly owns a majority interest in, or is under common control with, the issuer of the debt security;
• an issuer of equity securities listed on the NYSE has guaranteed the debt security; and/or
• an NRSRO has assigned a current rating to the debt security that is no lower than an S&P Corporation “B” rating or an equivalent rating by another NRSRO, or if no NRSRO has assigned a rating to the issue, an NRSRO has currently assigned an investment grade rating to a senior issue; or a rating that is no lower than an S&P Corporation “B” rating, or an equivalent rating by another NRSRO, to a pari passu or junior issue.